If you have stock options that end up making money (In-The-Money), you get actual money. But if they don’t make money (Out-of-The-Money), they just expire without giving you anything.
In simple words’
Stock options contracts that are In-The-Money (ITM) are physically settled. Out-of-The-Money (OTM) stock options contracts expire worthlessly.
Index options are cash-settled, and the implications are as follows:
1. If the index options are bought:
- When contracts expire In-The-Money (ITM), a Securities Transaction Tax (STT) is applied to exercised contracts. The STT rate is 0.125% of the intrinsic value, which is the amount the option is in-the-money, calculated as intrinsic value multiplied by the quantity. It’s important to note that STT is not charged on the total contract value. Additionally, brokerage fees are incurred on both sides – when the options are purchased and when they are settled on the expiry day.
- When contracts expire Out-of-The-Money (OTM), they become worthless, and you lose the entire amount paid as a premium. Brokerage fees are only incurred on one side, specifically when the options are purchased, and not when they expire without value on the expiry day.
2. If the index options are shorted or sold:
- Securities Transaction Tax (STT) is applicable only on the sell-side, specifically when initiating a short position. As a result, there is no STT impact upon expiry. The trader retains the premiums received, and this outcome depends on the moneyness of the option contract.